Financial deal backfires on city water authority

March 10, 2009 4:00 AM

Bob Donaldson / Post-Gazette

Pittsburgh City Council member and candidate for mayor Patrick Dowd describes problems with the Pittsburgh Water and Sewer Authority bond issue that, he says, could lead to a liability of $3,800 for each customer.

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A complex financial deal is swamping the Pittsburgh Water and Sewer Authority, city Councilman Patrick Dowd said yesterday, laying the blame on Mayor Luke Ravenstahl, his foe in the Democratic mayoral primary.

Mr. Dowd targeted a $414 million debt package the authority entered into in June, saying the deal could explode due to the pullout of a firm that guaranteed some of its transactions. He called the deal "a perfect example of reckless decision-making" under Mr. Ravenstahl, citing costs that are already higher than expected by nearly $3 million, and called for an audit.

Mr. Ravenstahl defended the deal, saying it was the best available at the time and costs exceeded estimates only because the financial markets melted down. "To attempt to politicize this issue at the expense of ratepayers is unfortunate," he said, accusing Mr. Dowd of releasing "some sensitive information" on the guarantee pullout.

Mr. Dowd said the information should be public, saying that "this administration and the authority have sought to keep the ratepayers in the dark, and they must come clean about the unbelievable risk" in the deal.

The $414 million, 30-year bond deal included $18.5 million in no-bid insurance premiums, consulting fees and payments to terminate 1-year-old contracts. It also refinanced old debt and brought the authority $98 million to pay for water and sewer improvements without a water rate increase.

It uses a tool called a swap that involves parties selling bonds to each other weekly at rates driven in part by averages of other swap deals. The credit crunch depressed those averages, which pushed up the water authority's payments to, so far, $2.9 million more than expected, according to authority Executive Director Michael Kenney.

The authority has been paying the higher-than-expected costs using the interest on the $98 million it raised in the deal. It has pushed back some improvement projects by six to 12 months to keep making the payments.

Worsening the situation, the New York firm Dexia Credit Local told the authority in December that it would not extend its agreement to guarantee the sale of some of the weekly bonds after it expires in June.

"In simple terms, the authority doesn't have an insurance contract for this bond deal," said Mr. Dowd, who joined the water authority board late last year. He said Dexia's pullout could leave the 83,000 ratepayers responsible for $320 million in principal -- $3,855 each -- and drive the authority toward bankruptcy.

Mr. Kenney said there's no risk of bankruptcy. The authority may pay another firm a much higher premium to guarantee the bond sales, get a letter of credit, or convert variable debt to a fixed rate.

Mr. Dowd said higher premiums on the bond sale guarantees would add $58 to the average ratepayer's annual bill. Mr. Kenney said it wouldn't be that high.

The councilman -- who has a doctorate, taught at a private school and was a city school board member -- called the deal "one of the most opaque and complicated things I have ever tried to understand."

"The losers are the ratepayers. Who are the winners? A series of hand-picked firms. This was not a competitively bid contract."

Mr. Kenney said that if the authority went with a standard bond issue, rather than the complex debt swap, it would have cost $5.7 million more each year.

City Controller Michael Lamb disputed that. "This has turned out to be far worse," he said, than a plain-vanilla debt package the authority turned down in 2007, just before it started using swaps.

"They need to find a way out of this deal, and they need to find a way to not enter into these kinds of deals into the future," said Mr. Lamb.